The company’s chief financial officer says the downturn was a necessary evil to shake out unsound businesses
Belinda Anderson
The management of Idion Technologies is more confident than ever about the strength of the business. But, on release of its half-year numbers, the market knocked another 20% off the share price taking it down to 65c a share by midday on Tuesday.
Idion derives 90% of its turnover from Vision Solutions in the United States, the software company it bought at the top of the market that has now dwarfed the local operations.
Group revenue for the six months increased by 6% to R94,3-million, but there was a decline in headline earnings of 13%, a loss of 19,5c against a 17,3c loss in the same period the year before.
Operating losses for the group were R33,8-million, almost double the like-for-like loss of R18,5-million the year before.
Chief executive Nicolaas Vlok predicts profitability in the second quarter of the year an expectation that he says could be derailed only by “a major economic catastrophe”.
The past six months has been a period of “investment and consolidation” for Idion, says Vlok. Idion spent R12-million across the group during the six months, investing in people and infrastructure, and was left with R22,7-million in cash at the end of the period. Cash of R4-million flowed into the business from operations.
Vlok does not expect a V-shaped recovery in the US, but rather an 18-month, more sustainable recovery. Vision’s chief financial officer Tim Keithahn says the downturn was almost a necessary evil to shake out the unsound businesses in the industry.
“It gave us time to clean up our balance sheet and improve our management. Vision has never been a stronger business than it is now,” he says. But he warns that they are still conservative in their expectations: “Improvement in one quarter doesn’t make a recovery yet.”
One issue when looking at half-year results for Idion is that Vision’s business is seasonal in nature and characteristically does not show profit in the first half of the year. Only between 30% and 35% of Vision’s turnover comes through in the first half of the year.
Keithahn says management initially thought this seasonality could be smoothed, but it has discovered it is not a symptom of managements but a reality of companies not spending on their IT budgets at that time of the year.
Another factor draining Idion’s numbers this half is the pain they have taken to fix the local operations. Recently installed Idion Solutions CEO (South African operations) Ken Jarvis is very bullish and announces a partnership with MTN and IBM, with the promise of more to come in the near term.
He says Idion’s relationship with Microsoft locally has also strengthened significantly.
The local business lost R6,1-million during the past six months. A large part of fixing these operations has been an overhaul of the sales team. Jarvis says three large contracts were priced incorrectly and ran over the expected time frame. Two of the three problematic contracts have since been completed and a third has now entered the support stage.
He says future projects will be priced in stages instead of upfront. Vlok says Idion Solutions should also be profitable in the second half as a result of these actions.
The figure that Vlok, Keithahn and group finance director Willem Richard all say is a good indication of the health of the group’s business going forward is that of deferred revenue, which grew by 96% to R68,5-million. Richard says this is a measure of the business that has already been done and will be carried over in to the second half of the year a correct and conservative approach from an accounting point of view. Maintenance revenue, which is an indication of annuity income, expanded by 58% to R36-million for the six months.
Keithahn explains how Vision’s software products which are being used by 44 of the Global Fortune 100 companies are sold in conjunction with a service or support package. So the income for Vision is very much annuity-based or recurring. Jarvis has the task of doing the same for the South African operations Idion Solutions has had no annuity income.
Vlok’s target is to grow the software and services aspects of Idion jointly introducing new products to the market at the same time as being able to offer a full support and service-orientated offering.
The cancellation of Idion’s discussions this year with a US software company instilled fear that its new product offerings had been dealt a severe blow.
But Vlok says the company would not have been able to offer much more to the market with the purchase. Instead a chief technology officer in the US has been appointed to head up the software development side of the business and there are plans to release a whole new product offering to the market in the first half of next year.
The company has also invested in extra infrastructure and management for the EMEA (Europe, Middle East and Africa) and APAC (Asia Pacific) regions. Keithahn says the operations in these regions has been growing so quickly that he wouldn’t be surprised to see them exceeding the US operations in the future.
Idion’s primary target market up to now has been the enterprise market in other words, corporates with staff numbers exceeding 5000. But it has identified the medium, mid and small business markets as holding significant opportunities. It is expanding into these markets through partnerships.
Vlok says Idion has had no trouble keeping staff and has a very low turnover rate globally.
“There have also been no staff reductions based on the economic climate,” he says. Keithahn attributes this in part to not overstaffing at times when Idion’s competitors were doing so.
Idion is also shelving its old share option scheme for one that is less expensive to manage. The previous scheme allotted shares to staff, but Vlok says they would sometimes leave before being eligible to purchase their allotted shares and the purchase would then have to be undertaken by the company. The new scheme will be a straight share option allotment. The old scheme will run concurrently with the new, but the old incentives will not be repriced.
The proposed new scheme will be voted on by shareholders on August 21.